A leader in an in­dus­try that marches to its own tune: take a bite of Yel­low Cake

The firm spe­cialises in turn­ing ura­nium into nu­clear fuel, where an im­bal­ance be­tween sup­ply and de­mand could get prices mov­ing, says Russ Mould

The Daily Telegraph - Business - - Business - Russ Mould is in­vest­ment di­rec­tor at AJ Bell, the stock­bro­ker

IN­VESTORS who do not like the risk that comes with smaller stocks can look away now. Those who run screens for eth­i­cal, so­cial and gov­er­nance (ESG) fac­tors can also move on, as the nu­clear power in­dus­try is un­likely to pass even the most ba­sic of their tests.

Port­fo­lio-builders who are pa­tient, risk­tol­er­ant and look­ing for an in­dus­try that more or less marches to its own beat, pretty much re­gard­less of what is go­ing on in the rest of the world, can read on, espe­cially if they are of a con­trar­ian bent. Yel­low Cake’s spe­cial­ity is ura­nium ox­ide (U3O8), a mid­dle stage be­tween min­ing and pro­duc­tion of the com­mod­ity, and its en­rich­ment, so it can be used as fuel. This ex­per­tise means Yel­low Cake does not carry the risks that come with the min­ing process it­self.

Long-term sup­ply deals with two ma­jor sup­pli­ers, Kazatom­prom and Cameco, also leave it in a po­ten­tially strong po­si­tion. A trad­ing up­date last month showed that Yel­low Cake owned around 9.3 mil­lion pounds of ura­nium ox­ide, to give the com­pany a net as­set value (NAV) of some $316m, or 292p a share. At the cur­rent price of 212.5p the shares trade at a hefty dis­count to that level and as a re­sult, man­age­ment has be­gun a share buy­back pro­gramme. The dis­count to NAV may re­flect con­cern that prices could soften again if the Covid-en­forced sup­ply shut­downs come to an end, as well as scep­ti­cism over the long-term for­tunes of the nu­clear in­dus­try in the wake of the 2011 ac­ci­dent in Fukushima, Ja­pan.

Some in­vestors may also be con­cerned that they have missed their chance af­ter the surge in the price of U3O8 from $25 a pound to about $33 since the spring. Yet global ura­nium pro­duc­tion in 2019 was es­ti­mated to be run­ning at barely 140 mil­lion pounds against de­mand of nearly 170 mil­lion. Util­i­ties have stock­piles they can tap, but this year’s mine shut­downs will tighten things fur­ther, and ura­nium spot prices are still be­low the cost of min­ing it.

This sit­u­a­tion is un­likely to last for­ever, espe­cially as many util­i­ties are com­ing to the end of long-term sup­ply con­tracts and need to es­tab­lish new ones. If sup­ply and de­mand stay out of kil­ter for too long, the price of the com­mod­ity could keep ris­ing, just as it did more than a decade ago when ura­nium peaked near $140 a pound.

Many in­vestors will still turn away, given the risks in­volved. There could still be fur­ther re­sis­tance to nu­clear power, and it takes two years or so to turn ura­nium ox­ide into us­able fuel rods, so any fur­ther ad­vance in Yel­low Cake’s as­set val­u­a­tion may need time. That said, a firm that leads its field, whose core prod­uct is ris­ing in price and whose shares are trad­ing at a dis­count to NAV sounds like a good start for in­trepid smaller-com­pany in­vestors.

Questor says: buy Ticker: YCA

Share price at close: 212.5p

Up­date: Res­o­lute Min­ing

The say­ing “Gold is money and ev­ery­thing else is credit” is at­trib­uted to John Pier­pont Mor­gan, and the pre­cious metal’s romp to new record highs is cur­rently jus­ti­fy­ing this col­umn’s faith in it.

A near-term re­ver­sal is pos­si­ble af­ter this year’s stun­ning run but the long-term case seems in­tact as in­ter­est rates re­main an­chored at their lows, gov­ern­ments con­tinue to pile up ev­er­higher bud­get deficits, and cen­tral banks are more in­clined to add to quan­ti­ta­tive eas­ing than with­draw it.

Such a back­drop is nat­u­rally helpful for gold min­ers such as Res­o­lute Min­ing, which op­er­ates mines in Mali and Senegal and owns one in Ghana. A trad­ing up­date last month fea­tured no neg­a­tive sur­prises as the com­pany stuck to its goal of pro­duc­ing 430,000 ounces of gold at an “all-in sus­tain­ing cost” of $980 – barely half of the cur­rent gold price. Hold.

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